National Institute of Economic and Social Research

Tuesday, 10 April 2012

Is austerity self-defeating: of course it is. My contribution to the VoxEU debate

My contribution to the VoxEU debate "Has austerity gone too far?" is here. Since it is in large part a critique of Giancarlo Corsetti's piece here, best to read that first.

Briefly, I argue that Corsetti's article is misleading, and, if taken seriously by policymakers, potentially damaging, for three reasons. First, it fails to distinguish between eurozone countries and those that have monetary sovereignty, for which these tradeoffs, at least in this form, simply don’t apply. Second, it fails, for the former, to correctly identify the source of sovereign risk, and hence risks prescribing policies that will be ineffective if not damaging. And third, it treats individual countries as if they were making independent policy decisions –when, of course, this crisis is a eurozone crisis and needs to be addressed as such.

Consequently, the question posed by this Vox debate – “Is austerity self-defeating”? – more or less answers itself, when looked at a European level. Of course it is. The much more difficult task for European economists is to convince European policymakers that this is not the question they should be asking at all.